<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- - ---------EXCHANGE ACT OF 1934
For the quarterly period ended November 28, 1999
-------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- - -------- EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission File Number 0-619
----------------------------------
WSI Industries, Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant, as specified in its charter)
Minnesota 41-0691607
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation of organization) Identification No.)
Long Lake, Minnesota 55356
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(612) 473-1271
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
2,458,425 Common Shares were outstanding as of December 31, 1999.
<PAGE> 2
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets November 28, 1999 (Unaudited)
and August 29, 1999 3
Consolidated Statements of Operations
Thirteen weeks ended November 28, 1999 and
November 29, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows
Thirteen weeks ended November 28, 1999 and
November 29, 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8, 9, 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 11
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS NOVEMBER 28, AUGUST 29,
1999 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,301 $ 131,588
Accounts receivable 3,666,993 2,962,268
Inventories 3,011,356 3,491,900
Prepaid and other current assets 51,877 72,478
--------------- ---------------
Total current assets 6,736,527 6,658,234
Property, plant and equipment, net 11,417,871 12,181,909
Intangible assets, net 5,616,155 5,684,869
--------------- ---------------
$ 23,770,553 $ 24,525,012
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility $ $ 279,578
Trade accounts payable 1,687,144 1,438,324
Accrued compensation and employee withholdings 883,306 627,731
Accrued real estate taxes 133,715 166,709
Miscellaneous accrued expenses 396,131 549,946
Acquisition payments due 500,000 742,733
Current portion of long-term debt 1,356,657 1,442,199
--------------- ---------------
Total current liabilities 4,956,953 5,247,220
Long-term debt, less current portion 10,359,191 10,666,120
Long-term pension liability 121,375 347,437
STOCKHOLDERS' EQUITY:
Common stock, par value $.10 a share; authorized
10,000,000 shares; issued and outstanding 2,458,425 and
2,453,425 shares, respectively 245,843 245,343
Capital in excess of par value 1,617,927 1,600,302
Retained earnings 6,469,264 6,418,590
--------------- ---------------
Total stockholders' equity 8,333,034 8,264,235
--------------- ---------------
$ 23,770,553 $ 24,525,012
=============== ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
--------------------------------
November 28, November 29,
1999 1998
-------------- ---------------
<S> <C> <C>
Net sales $ 7,294,952 $ 5,640,708
Cost of products sold 6,267,595 4,815,677
-------------- ---------------
Gross margin 1,027,357 825,031
Selling and administrative expense 979,700 543,638
Pension curtailment (232,000)
Gain on sale of equipment (269,073)
Severance costs 248,507
Interest and other income (6,981) (67,071)
Interest and other expense 253,530 59,692
-------------- ---------------
Earnings from operations
before income taxes 53,674 288,722
Income tax expense 3,000 11,800
-------------- ---------------
Net earnings $ 50,674 $ 276,972
============== ===============
Basic earnings per share $ 0.02 $ 0.11
============== ===============
Diluted earnings per share $ 0.02 $ 0.11
============== ===============
Weighted average number of
common shares 2,455,073 2,448,000
========= =========
Weighted average number of
common and dilutive potential
common shares 2,503,793 2,552,053
========= =========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
13 weeks ended
--------------------------------
November 28, November 29,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 50,674 $ 276,972
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of property, plant & equipment (269,071) (2,605)
Depreciation and amortization 594,379 317,990
(Decrease) in pension liability (226,062) (5,676)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (704,725) 354,355
(Increase) decrease in inventories 480,544 (51,575)
(Increase) decrease in prepaid expenses 20,600 67,971
Increase (decrease) in accounts payable and
accrued expenses 74,855 (769,247)
------------- -------------
Net cash provided by operations 21,194 188,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 562,000 2,605
Purchase of property, plant and equipment (54,556) (89,587)
------------- -------------
Net cash provided by (used in) investing activities 507,444 (86,982)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (672,050) (181,826)
Issuance of common stock 18,125
------------- -------------
Net cash provided by (used in) financing activities (653,925) (181,826)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (125,287) (80,623)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 131,588 2,697,104
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF REPORTING PERIOD $ 6,301 $ 2,616,481
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 253,003 $ 59,631
Income taxes $ 0 $ 6,000
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
WSI INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated balance sheet as of November 28, 1999, the
consolidated statements of operations for the thirteen weeks ended
November 28 1999 and November 29, 1998 and the consolidated statements
of cash flows for the thirteen weeks then ended, respectively, have
been prepared by the Company without audit. In the opinion of
management, all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows for all periods presented have
been made.
The balance sheet at August 29, 1999 is derived from the
audited balance sheet as of that date. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted. Therefore, these condensed consolidated financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1999 annual report to
shareholders. The results of operations for interim periods are not
necessarily indicative of the operating results for the full year.
Effective February 15, 1999, the Company acquired Taurus
Numeric Tool, Inc. ("Taurus") in a stock purchase transaction using
cash on hand, borrowings from a bank and subordinated debt from the
previous owner. Effective August 6, 1999, the Company acquired Bowman
Tool & Machining, Inc. ("Bowman") in a stock purchase transaction using
borrowings and a mortgage from a bank and subordinated debt from the
previous owner. Accordingly, the balance sheets as of November 28, 1999
and statements of operations and cash flows of Taurus and Bowman have
been consolidated for the quarter then ended into WSI Industries, Inc.
2. Business Consolidation and Relocation:
On September 2, 1999, the Company announced that it was closing its
Long Lake, Minnesota facility and transferring all of it production to
its Taurus and Bowman subsidiaries. As a result of this consolidation,
the Company incurred severance costs in the first quarter of 1999 for
employees terminated or given notice in that period. WSI was also able
to sell excess production equipment in the quarter. Concurrent with the
consolidation decision, the Company also decided to terminate its
defined benefit pension plan. See the accompanying Management
Discussion and Analysis for quantification of these events.
3. DEBT AND LINE OF CREDIT:
Pursuant to the Bowman transaction, the Company amended its
credit and security agreement with its bank. The amended agreement
calls for a term loan in the principal amount of $4,400,000 and
6
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a revolving credit facility in the maximum amount of $3,000,000 and
expires March 31, 2002. Interest is accrued at prime plus .75% for the
term loan and prime plus .50% for the revolving credit facility. Each
facility has a LIBOR rate option. The term loan is payable in equal
monthly installments of $52,381 of principal commencing August 31,
1999. At November 28, 1999, the outstanding balance on the term loan
was $4,243,000 while there was no outstanding balance on the revolving
facility. The fair value of the term debt is estimated to be its
carrying value since the debt has a variable interest rate.
During fiscal 1999 the Company obtained a mortgage with the same
bank that it currently has its term debt and line of credit facility.
The agreement requires monthly principal payments of $13,889 and has a
balance at November 28, 1999 of $2,458,000. Interest on the mortgage is
calculated at the bank's base rate plus 1.0% and is paid monthly. The
entire balance is due August 6, 2004.
The Company also entered into Subordinated Promissory Notes
with both of the former owners of Taurus and Bowman in the total amount
of $2,507,000. The notes bear interest at 7.75% with interest payable
quarterly. Principal payments are due in three equal installments
commencing annually on February 15, 2002 for the Taurus related note
and August 6, 2002 for the Bowman related note.
4. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 Earnings per
Share. Statement 128 replaced the previously reported primary and fully
diluted earnings per share with basic and diluted earning per share.
Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
7
<PAGE> 8
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Thirteen weeks ended
----------------------------------------
November 28, November 29,
1999 1998
---- ----
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net Earnings $ 50,672 $ 276,972
====== =======
Denominator:
Denominator for basic earnings
per share - weighed average shares 2,455,073 2,448,800
Effect of dilutive securities:
Employee/and non-employee options 48,720 103,253
------------- --------------
Dilutive common shares
Denominator for diluted earnings
per share 2,503,793 2,552,053
========= =========
Basic earnings per share $ 0.02 $ 0.11
==== ====
Diluted earnings per share $ 0.02 $ 0.11
==== ====
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
and
RESULTS OF OPERATIONS
Results of Operations:
Net sales of $7,295,000 for the quarter ending November 28,
1999 increased 29% or $1,654,000 from the same period of the prior
year. Sales growth was generated by the Taurus and Bowman subsidiaries,
whose combined sales more than offset the year over year decline in the
agribusiness market. In the first quarter, the agriculture market
accounted for 29% of total sales, as opposed to 68% from the prior year
first quarter. The construction market accounted for 29% of sales,
followed by aerospace/avionics/defense at 21%. Recreational vehicles
and computer components make up the remainder of the sales markets.
Gross margin remained steady at 14% in comparison to the year
ago period, with the profitability of Bowman and Taurus operations
largely offsetting consolidation related expenses including equipment
moving, hiring, training and start-up expenses.
Selling and administrative expense of $979,000 was $435,000
higher than in the prior year period. The amount was higher due to the
addition of Taurus and Bowman selling and administrative expense as
well as intangible asset amortization not incurred in Fiscal 1999.
Interest and other income was $62,000 lower than the
comparable period of the prior year due to lower cash balances which
generated less interest income.
Interest and other expense increased $195,000 in the period
versus the prior year due to the addition of capitalized leases and the
debt incurred on the Bowman and Taurus transactions.
The Company also recorded $249,000 in severance costs in
association with the Long Lake, Minnesota plant shutdown. WSI also sold
excess manufacturing equipment with a net book value of $293,000 for
$562,000, generating a gain of $269,000.
The Company is also terminating its defined benefit pension
plan. The termination resulted in the recognition of prior service
costs of $1,043,000, offset by the reduction in future benefits of
$407,000, and by the recognition of the gain of the fair market value
of the pension plan assets over their cost basis of $868,000. The
combination of the above events resulted in a gain of $232,000 for the
F2000 first quarter.
In the thirteen week period ended November 28, 1999, the
Company recorded a tax provision of $3,000 to cover mandatory state
income taxes and federal alternative minimum taxes, and was able to
recognize the benefit of a portion of its net operating loss
carry-forwards. The Company has not recorded the benefit of net
operating losses and other net deductible temporary differences in the
consolidated statement of operations due to the fact that the Company
has not been able to establish that it is more likely than not that the
tax benefits will be realized.
9
<PAGE> 10
Liquidity and Capital Resources:
On November 28, 1999 working capital was $1,780,000 compared
to $1,411,000 at August 29, 1999, an increase of $369,000, due
primarily to a reduction in the revolving line of credit and
acquisition payments due. The ratio of current assets to current
liabilities at November 28, 1999 and August 29, 1999 was 1.36 to 1.0
and 1.27 to 1.0, respectively.
As described previously in the Notes to Consolidated
Statements, the Company amended its credit and security agreement with
its bank on August 6, 1999. Currently, the Company owes $4,243,000 on
its term loan facility but does not have a balance due on its revolving
facility. The revolving facility had $3,000,000 of availability at
November 28, 1999. The term loan carries an interest rate at prime plus
.75%. The revolver rate is at prime plus .50%.
The Company also entered into a mortgage with the same bank on
August 6, 1999 as outlined in the Notes to Consolidated Statements. The
Company currently owes $2,453,000 with interest paid at prime plus
1.0%.
As also described in the Notes, the Company entered into a
subordinated promissory note with the former owner of Taurus for
$1,663,000. Interest is accrued at a rate of 7.75% paid quarterly.
Principal payments are due in three equal annual installments
commencing on February 15, 2002. The Company also has a subordinated
promissory note of $844,000 with the former owner of Bowman. Interest
is accrued at 7.75% payable quarterly with principal payments due in
equal installments commencing August 6, 2002.
Total capitalized lease debt of $2,508,000 on November 28,
1999 was $194,000 lower than on August 29, 1999. The decrease resulted
from payments on the leases with no new additions during the quarter.
It is management's belief that its internally generated funds
combined with the line of credit will be sufficient to enable the
Company to meet its financial requirements during fiscal 2000.
Year 2000 Compliance:
There were no material effects from the Year 2000 conversion.
Cautionary Statement:
Statements included in this Management's Discussion and
Analysis of Financial Condition and Results of Operations, in the
letter to shareholders, in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and
in oral statements made with the approval of an authorized executive
officer which are not historical or current facts are "forward-looking
statements." These statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and
are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following
important factors, among others, in some cases have affected and in the
future could affect the Company's actual results and could cause the
Company's actual financial performance to differ materially from that
expressed in any
10
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forward-looking statement: (i) the Company's ability to obtain
additional manufacturing programs and retain current programs; (ii) the
loss of significant business from any one of its current customers
could have a material adverse effect on the Company; (iii) a
significant downturn in the industries in which the Company
participates, principally the agricultural industry, could have an
adverse effect on the demand for Company services; (iiii) Year 2000
issues which may result in computer system failures or disruption of
operations including engaging in routine business activities. The
foregoing list should not be construed as exhaustive and the Company
disclaims any obligation subsequently to revise any forward-looking
statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
1. Not applicable.
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K:
A. Exhibit 27 Financial Data Schedule, Q1, Fiscal 2000
B. There was a Form 8-K filed effective September 16, 1999
describing the Company's intent to shut down the Long
Lake, Minnesota plant.
C. There was a Form 8-K\A filed effective October 20, 1999
describing the Company's purchase of Bowman Tool &
Machining, Inc. and corresponding other events.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WSI INDUSTRIES, INC.
Date: January 12, 2000 /s/ Michael J. Pudil
---------------- ----------------------------------------
Michael J. Pudil, President & CEO
Date: January 12, 2000 /s/ Paul D. Sheely
---------------- ----------------------------------------
Paul D. Sheely, Vice President & CFO
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-27-2000
<PERIOD-END> NOV-28-1999
<CASH> 3,006
<SECURITIES> 0
<RECEIVABLES> 3,694,493
<ALLOWANCES> 27,500
<INVENTORY> 3,011,356
<CURRENT-ASSETS> 6,736,527
<PP&E> 24,465,019
<DEPRECIATION> 13,047,148
<TOTAL-ASSETS> 23,770,553
<CURRENT-LIABILITIES> 4,956,953
<BONDS> 10,359,191
0
0
<COMMON> 245,843
<OTHER-SE> 8,087,191
<TOTAL-LIABILITY-AND-EQUITY> 23,770,553
<SALES> 7,294,952
<TOTAL-REVENUES> 7,294,952
<CGS> 6,267,595
<TOTAL-COSTS> 6,267,595
<OTHER-EXPENSES> 720,153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,530
<INCOME-PRETAX> 53,674
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 50,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,674
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
